What You Need to Know About PAYGO and Tax Reform

Statutory Pay-As-You-Go (PAYGO) – or “tough, old-fashioned paygo” as Senator Conrad (D-ND) used to call it – is intended to prevent legislative changes to mandatory spending programs or revenues that increase debt. Specifically, Statutory PAYGO applies to “a bill or joint resolution [this includes reconciliation] that affects direct spending or revenues relative to the [current law] baseline.”

Statutory PAYGO was originally enacted as part of the Budget Enforcement Act of 1990 (Title XIII of P.L. 101-508) and was extended through 2006 in the Budget Enforcement Act of 1997 (Title X of P.L. 105-33). (I know what you’re thinking… “really great titles, guys.”) However, PAYGO went unenforced from December 2002 through 2006 after President Bush signed P.L. 107-312 that eliminated any PAYGO balances. 

In February 2010, President Obama signed a bill increasing the debt limit (P.L. 111-139), but it also permanently resurrected statutory PAYGO. When PAYGO returned, Democrats controlled the House, the Senate, and the White House. In fact, it was a campaign issue for Democrats in 2006 who wanted to discourage unoffset tax cuts.

To enforce PAYGO, the law establishes a five- and ten-year scorecard (maintained by OMB using cost estimates provided by CBO). When a law is enacted that changes mandatory spending or revenues, the average of the five- and ten-year primary deficit effects are added to the balance of the scorecard. For example, if a bill increases the deficit by $100 billion over the FY 2018 to 2022 period, $20 billion would be added to the balance of the five-year scorecard in each of the five years.  

If at the end of a session of Congress there is a positive balance on either or both scorecards, there will be a sequester on nonexempt mandatory spending programs. The sequester is equal to whatever positive balance is higher of the five- and ten-year scorecards in any budget year. In the previous example, if the $20 billion in each year remains unoffset, there will be a mandatory spending sequester in each of the five years equivalent to the difference between the $20 billion and the current balance for each of the five years. 

Why does any of this matter? There are currently negative balances on the five- and ten-year scorecards in 2018 of $3.252 and $14.099 billion, respectively. In other words, there is room to increase the deficit without triggering a sequester! However, the budget impact of the tax legislation enacted will reverse this balance. 

H.R. 1, the Conference Agreement on the tax bill, would trigger a sequester of $212 billion in 2018 pursuant the PAYGO rules after adjusting for the current positive balances on the scorecards. If the sequester is allowed to go into effect in 2018 it will translate into a monthly reduction in Medicare spending (mostly provider payments) of approximately $25.5 billion and a 100 percent reduction in all other non-exempt mandatory spending. 

It is difficult to estimate exactly what the Medicare sequester would be in future years given that the base used to determine the sequester has not yet been calculated by the Office of Management and Budget (OMB). However, the sequester on all other non-exempt mandatory spending would likely by 100 percent for at least the next five years. 

Usually when Congress passes major tax legislation on a bipartisan basis there’s a little clause at the end of the bill that excludes any of the budgetary effects of the bill from being added to the PAYGO scorecards (look for the section titled “Budgetary Effects”). However, this language violates the Byrd Rule (it doesn’t score) and is therefore prohibited in reconciliation. This is why Congress is currently considering including a waiver of the PAYGO rules for the balance of the tax bill on a bipartisan piece of legislation, such as the short-term continuing resolution.